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CAPITAL GAINS
Capital Gains Tax under the Income Tax Act is tax payable on the transfer of a
capital asset situated in India. Capital Assets according to the Income Tax Act, 1961
is property of any kind held by an assessee, whether or not connected with his
business or profession. The transfer of capital asset must be made in the previous
year. This is taxable under the head Capital Gains and there must exist a capital
asset, transfer of the capital asset and profit or gains arising from the transfer. That is a
person is taxable on the profits and gains derived from the transfer of a capital asset.
Capital gains tax in India is payable at different rates depending on the holding period
of the capital asset.
Capital assets held for more than 36 months are considered as long-term capital
assets. Shares held for more than 12 months are considered long-term capital assets.
The 12-month holding period applies only to specific securities, including shares in a
Company. Other kinds of securities such as debentures, options, or bonds must be
held for more than 36 months to qualify for the long-term capital gains tax rates.
Long-term capital gains are generally taxable at 20% and short-term capital gains at
30%.
Indexation benefits are available to Indian residents on long-term capital gains except
where the long-term capital asset is a bond or debenture other than capital indexed
bonds issued by the government. Short term capital losses can be offset against shortterm and long-term capital gains, while long-term capital losses can only be offset
against long-term capital gains. Further, capital gains tax is payable in the tax year in
which the capital asset is transferred, regardless of the year in which consideration is
actually received.
As per Section 2 (47) of the Income Tax Act for a transfer to be treated as a capital
gain the previous owner must relinquish all the rights on the said property. If the
property is used as a share it will be regarded as a capital gain as well. Further,
according to Section 9 (1)(i) of the Act income accruing indirectly or directly out of
transfer of Capital Assets situated in India is deemed to accrue in India out of the hand
of a Non-Resident.
CORPORATE STRUCTURING (M&A)
Amalgamation is a merger of one or more companies with another company or that of
two or more companies to form one company. All the property and liabilities of the
Capital gains tax exemption for the amalgamating company: Any transfer
of a capital asset by the amalgamating company to an Indian amalgamated
company is exempt.
Capital gains tax exemption for the shareholders of an amalgamating
company: Under an amalgamation scheme, the amalgamating company
shareholders receive shares in the amalgamated company in exchange of
shares of the amalgamating company. A transfer by such a shareholder, where
the capital asset is shares in the amalgamating company, is exempt from
capital gains tax, provided the transfer is made in consideration for allotment
of shares in the amalgamated company to such shareholder and the
amalgamating company is an Indian company. Therefore, if the shareholders
receive consideration other than shares, the gains are subject to capital gains
tax.
Capital gains tax exemption for a foreign amalgamating company: A
transfer of capital asset by a foreign amalgamating company to the foreign
amalgamated company, where the capital asset is shares in an Indian company
is exempt from capital gains tax, provided: at least 25% of the shareholders of
the foreign amalgamating company continue to remain shareholders in the
amalgamated company; the transfer does not attract tax on capital gains in the
country in which the amalgamating company is incorporated.
The tax implications of a transfer of capital assets depend on whether the assets are
eligible for depreciation under the Income Tax Act. For assets on which no
depreciation is allowed, consideration in excess of the cost of acquisition and
improvement is taxable as a capital gain.
For the purposes of calculating the inflation adjustment, the assets acquisition cost
can be the original purchase cost. Inflation adjustment is calculated on basis of
inflation indices prescribed by the government of India.
For assets on which depreciation has been allowed, the consideration is deducted from
the tax written-down value of the block of assets, resulting in a lower claim for tax
depreciation going forward. If the unamortized amount of the block of assets is less
than the consideration received or the block of assets ceases to exist (i.e. there are no
assets in the category), the difference is treated as a short-term capital gain. If all the
assets in a block of assets are transferred and the consideration is less than the
unamortized amount of the block of assets, the difference is treated as a short-term
capital loss.
Goodwill arises when the consideration paid is higher than the total fair value/cost of
the assets acquired. This arises only in situations of a slump-sale. Under the tax law,
only depreciation/amortization of intangible assets, such as knowhow, patents,
copyrights, trademarks, licenses and franchises or any similar business or commercial